Facebook assets frozen in bizarre New York lawsuit

By Stacy Cowley, tech editorJuly 13, 2010: 6:38 PM ET

NEW YORK (CNNMoney.com) -- Proving that even a seemingly frivolous lawsuit can throw a wrench in the corporate works, Facebook is fending off a New York restraining order temporarily preventing it from transferring or selling any of its assets.

The order stems from a case filed in late June in New York's Allegany County state court by Paul Ceglia, a local resident who claims that in 2003 he paid Facebook founder Mark Zuckerberg $1,000 to build a website "designed to offer the students of Harvard university access to a wesite [sic] similar to a live functioning yearbook with the working title of 'The Face Book.'"

In return, Ceglia was to receive a 50% stake in the site, according to a contract he filed with the court. Based on the contract's details, he is now seeking 84% ownership of Facebook -- a Palo Alto, Calif., company that investors have valued at $15 billion. "Time is of the essence as I have not received any remuneration from the Defendants," Ceglia said in his affidavit to the court. (To see Ceglia's legal filing, including the alleged contract, click here.)

His complaint prompted Judge Thomas Brown to slap Facebook with a restraining order preventing any asset sales -- though Brown struck down a proposed clause that would have blocked Facebook from accessing any money stashed in its bank accounts.

Facebook fired back by having the case transferred to federal district court in Buffalo, where it is currently pending. In a motion filed Friday, Facebook asked the federal court to dissolve the restraining order. Ceglia "has utterly failed to meet the procedural and substantive requirements for such drastic relief, and the order issued by the state court is similarly flawed and woefully inadequate," the company wrote.

"We believe this suit is completely frivolous and we will fight it vigorously," a Facebook spokesman said in response to the lawsuit. "The order will not affect our ability to do business, but we do not believe it is legally supported and we have moved to have the it vacated."

Facebook's legal filings document a laundry list of objections to the state court's action, which was issued without any notice to Facebook. The company also notes that New York's six-year statute of limitations almost certainly bars Ceglia's attempt to take action on a seven-year-old alleged contractual breach.

Ceglia has a checkered legal past. In 2009, New York Attorney General Andrew Cuomo sued Ceglia for allegedly defrauding customers of a wood-pellet fuel company he owned. Cuomo won a restraining order binding the assets of Ceglia's Allegany Pellets after he charged the company with taking $200,000 in advance payments from customers and then failing to deliver the goods.

Cuomo's office said that an investigation into Paul Ceglia and his wife Iasia turned up evidence of "extensive real estate holdings, including 75 acres of oceanfront property in Nova Scotia; 30 acres and 70 rental properties in Wellsville; and their own residence on 2 acres in Wellsville."

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